Audit 101 - ASSERTIONS in plain English

Summary

In this video, the concept of audit assertions is explored in-depth, breaking down how auditors determine if financial statements are free from material misstatement. The video covers two main types of assertions: those related to transactions on the income statement (such as occurrence, completeness, and accuracy) and those related to balance sheet items (like existence, rights and obligations, and valuation). By highlighting the importance of classification, presentation, and disclosure, the video equips viewers with essential knowledge for conducting thorough audits, explaining how auditors ensure financial statements align with accounting standards.

Takeaways

• 😀 Assertions help auditors determine if financial statements are true and fair by testing various characteristics of transactions and balances.
• 😀 An assertion is a statement believed to be true, which in auditing is used to check the accuracy of financial statements.
• 😀 For transactions (income statement), auditors focus on six assertions: Occurrence, Completeness, Accuracy, Cut-off, Classification, and Presentation.
• 😀 Occurrence refers to whether a transaction actually happened and is supported by evidence (e.g., goods shipped, services rendered).
• 😀 Completeness ensures that all transactions have been recorded and nothing has been omitted or excluded.
• 😀 Accuracy checks if the financial amounts recorded reflect the true value of the transaction (correct price, quantity, total).
• 😀 Cut-off ensures that transactions are recorded in the correct financial period, especially important for companies with online sales.
• 😀 Classification ensures that transactions are recorded in the right account (e.g., debit and credit entries in the correct categories).
• 😀 Presentation ensures that transactions are disclosed correctly in accordance with accounting standards (IFRS, ASB, etc.).
• 😀 Assertions for balances (balance sheet) focus on Existence, Rights and Obligations, Completeness, Accuracy, Valuation and Allocation, Classification, and Presentation and Disclosure.

Q & A

What is the purpose of using assertions in auditing financial statements?

Assertions are used to determine whether the financial statements are true and fair, or free from material misstatement. They help auditors test whether the recorded transactions and balances align with the reality of the financial situation.

How do assertions help in auditing transactions?

Assertions around transactions help ensure that every aspect of a financial transaction is accurately recorded, including whether the transaction occurred, if all necessary transactions were included, and if the correct dollar amounts and time periods were used.

What does the assertion 'occurrence' mean in auditing transactions?

'Occurrence' means that the transaction really happened. For example, it checks if goods were actually shipped to a customer or if services were actually provided, ensuring the transaction is real.

What is the significance of the 'completeness' assertion?

'Completeness' ensures that all relevant transactions have been recorded, and none have been left out or excluded from the financial statements, providing a full picture of the company's financial activity.

What does 'accuracy' mean in the context of transaction assertions?

'Accuracy' means that the amounts recorded for transactions are correct. This involves checking whether the right prices, quantities, and totals were used when documenting a sale or purchase.

Why is the 'cut-off' assertion important in financial auditing?

'Cut-off' ensures that transactions are recorded in the correct financial period. It’s important for transactions that occur at the end of a reporting period to be accurately included or excluded based on the date.

What does the 'classification' assertion focus on?

The 'classification' assertion ensures that transactions are recorded in the correct categories on the financial statements. For example, it checks if a purchase is categorized correctly as an expense or asset.

How does 'presentation' impact the financial statements in an audit?

'Presentation' ensures that the financial statements are displayed in accordance with accounting standards, like IFRS or GAAP, and that disclosures about financial data are complete and accurately represented.

How are the assertions for balance sheets different from those for transactions?

Assertions for balance sheets focus on assets, liabilities, and owner’s equity. For example, they test whether assets and liabilities exist, whether the company has the right to record assets, and if the amounts are accurately valued and classified.

What is the 'existence' assertion for balance sheet items?

'Existence' in the balance sheet context checks if the assets, liabilities, and owner’s equity items truly exist. For example, it confirms whether a company really owns the asset listed or owes the liability.

How do the concepts of 'valuation' and 'allocation' differ from 'accuracy' in financial statements?

'Valuation' and 'allocation' go beyond just accurate dollar amounts. They focus on the method used to value an asset or liability and how it's allocated between different accounts. 'Accuracy' focuses solely on whether the amounts are correctly calculated based on proper documentation.